Analysis Interpretation of the news based on evidence, including data, as well as anticipating how events might unfold based on past events

China’s ZTE has long been on Washington’s radar, for quite a few reasons. Here’s the story.

Visitors test smartphones at ZTE’s stand during the Mobile World Congress in Barcelona in February 2016. (Getty Images/AFP)

ByGraham Webster

May 22, 2018

What is ZTE, and what’s the backstory on this Chinese telecom infrastructure and cellphone company? On May 13, President Trump tweeted that he was at work with China’s leader to save ZTE jobs.

A day later, amid criticism over why Chinese jobs were a priority during trade and investment negotiations with China, Trump tweeted: “ZTE, the large Chinese phone company, buys a big percentage of individual parts from U.S. companies. This is also reflective of the larger trade deal we are negotiating with China and my personal relationship with President Xi.”

Republicans and Democrats continued to question Trump’s actions, and much of the discussion has blended two separate — but related — struggles ZTE has experienced with the U.S. government.

Warnings of a national security threat

ZTE has long drawn scrutiny in Washington as a possible partner of Chinese intelligence or military agencies. U.S. officials believe ZTE products could help Chinese authorities gather information or interfere with U.S. networks.

In 2012, a House Intelligence Committee report scrutinized ZTE and Huawei, another Chinese IT company, concluding that “the risks associated with Huawei’s and ZTE’s provision of equipment to U.S. critical infrastructure could undermine core U.S. national-security interests.”

The report recommended that U.S. government and private-sector entities not use Huawei or ZTE products in their networks. The two companies, the report said, “cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.”

U.S. officials have repeatedly asserted that using products — including cellphones and network infrastructure — from the two Chinese companies could threaten national security. These warnings do not outline specific examples or mechanisms of the purported threat. They instead focus on what might be possible — for instance, that Huawei and ZTE might install vulnerabilities for Chinese government use.

The U.S. investigated sanctions violations

For ZTE, however, losing some U.S. sales was nowhere near as dangerous as what happened last month: Commerce Secretary Wilbur Ross announced on April 16 that the U.S. government would ban ZTE from using U.S. products. This would cut off an irreplaceable supply of components, and the announcement caused ZTE to cease “major operation activities.”

The U.S. ban, formally a “denial order,” came after two rounds of investigations. First, the government investigated ZTE for breaking U.S. sanctions by selling products containing U.S. technology to Iranian and North Korean customers. In March 2017, ZTE reached a settlement agreement in that investigation, in which it admitted to violations and “agreed to a record-high combined civil and criminal penalty of $1.19 billion.” Later, after ZTE was found to have violated the settlement, the Commerce Department imposed the more damaging ban on buying U.S. components.

In contrast to the security warnings, which had thin public justification, this penalty came after repeated, detailed public filings in the sanctions violation case, including the settlement and the denial order itself.

Before it was violated, the settlement had appeared to be a victory for U.S. law enforcement. An October 2017 document published by Commerce Department’s Bureau of Industry and Security, the agency responsible for the investigation, presented the ZTE case as a teachable moment for companies that might be similarly targeted.

The document, formatted as a slide presentation, was dated several months after the settlement but well before the denial order. The “lessons” listed included: “Don’t lie,” “Don’t restart your criminal activity during the investigation,” and “Don’t create a written, approved corporate strategy to systematically violate the law.” Or else, it follows, you might end up with an enormous fine like ZTE’s.

The final page included a warning from Ross: “Those who flout our economic sanctions and export control laws will not go unpunished — they will suffer the harshest of consequences.”

Six months later, in May 2018, the Commerce Department reacted to the alleged violation of this agreement by taking the steps that brought ZTE to the brink of collapse. Trump’s tweet seemed to order the department to find a way to prevent that collapse, and Ross then responded that Commerce was exploring “alternative remedies.” Reports suggest a deal is in the works that would allow ZTE continued access to U.S. components.

What does Trump’s intervention mean in context?

Some critics of ZTE, and of Trump’s sudden action to defend the company, seem to blend two separate concerns — warnings of national security risks and sanctions enforcement — as well as broader bilateral trade tensions.

Rep. Adam B. Schiff, the top Democrat on the House Intelligence Committee, responded to Trump’s initial tweet: “Our intelligence agencies have warned that ZTE technology and phones pose a major cyber security threat. You should care more about our national security than Chinese jobs.”

Sen. Marco Rubio, the Republican chairman of the Congressional-Executive Commission on China, tweeted: “Problem with ZTE isn’t jobs & trade, it’s national security & espionage. Any telecom firm in #China can be forced to act as a tool of Chinese espionage without any court order or any other review process. We are crazy to allow them to operate in U.S. without tighter restrictions.”

While Trump’s tweets framed the issues around jobs, Schiff, Rubio and other critics focused on the security risk. Few mentioned the sanctions enforcement matter at the center of Trump’s tweeted instruction to Commerce.

That’s what we know about ZTE’s struggles with the U.S. government. As politicians blend these narratives, several questions remain about security risks, sanctions enforcement and ZTE’s place in trade and investment tensions. First, are the U.S. national security warnings based on concrete events or speculation? Second, was the Commerce Department’s sanctions enforcement action influenced by broader security concerns about ZTE?

Third, was the severity or timing of ZTE’s “denial order” intended as a warning shot in the U.S.-China trade and investment confrontation? Fourth, what “larger trade deal” does Trump refer to in his tweet calling for action to save ZTE from destruction?

ZTE’s uncertain fate may help answer these questions and explain the course of the U.S.-China trade and investment confrontation and both countries’ policies regarding technology and security issues. However those currents flow, they will have enduring repercussions for U.S.-China relations.

Editor’s note: This post has been updated with the May 22 news report that the United States may offer ZTE a deal that allows for continued access to U.S. components.

Graham Webster (@gwbstr) is a senior fellow at Yale Law School’s Paul Tsai China Center and a DigiChina fellow at New America. He reports on this and other U.S.-China issues in his Transpacifica newsletter.